How to read candlestick charts (Volume 1)
Today we will learn how to read Japanese candles (also called "Japanese candlesticks") - the foundation of a crypto trader's education.
This tutorial is a fundamental basis for getting your trading activity off to a good start. You will see that reading a candlestick is a simple thing. Here we go!
Definition of Japanese candlesticks
Here is a chart with candlesticks:
A chart is a succession of candlesticks or Japanese candles that form a set allowing us to analyze the evolution of the value of an asset over a defined period of time (several days, several weeks, several months, several years, several decades...).
This type of chart is the most commonly used by traders. Indeed, this format allows us to obtain a lot of information and therefore make informed future decisions. It allows a complete reading which is facilitated by the color codes. Two colors: green and red.
When the candle is green, it means that the price has increased on the configured chart time scale. When the candle is red, it means that the price has decreased on the configured chart time scale.
For example, here is the BTC graph in 1M time scale (1 minute):
The one in time scale 1H (1 hour):
And finally the one in 1D time scale (1 day):
We can see that depending on the time scale, the information obtained and the dynamics of the graphs are not the same. This is quite logical because Japanese candlesticks do not represent the same movements.
Moreover, a single candlestick gives several pieces of information that will be important. In this article, for simplicity, we will consider that one candle represents 1 day.
The body will give us a lot of information, our example being a "red" daily candle.
High: the higher value of the day.
Open: the first value of the day.
Close: the last value of the day.
Low: the lowest value of the day.
Between the body and the high/low we have the "shadow" which is the price difference between the opening/closing price and the maximum/minimum value.
With this information, candlestick successions will read really easily.
You will have to take into account the opening and closing prices at first. Let's take our BTC chart in daily time scale and zoom in a bit:
If we were to trace the course through the clotures, this is what it would look like:
You will notice that this is the Orange curve on the Bitget charts:
Candlesticks can therefore help us enormously in understanding price movements.
Some shadows will be very small while others will be gigantic and some Japanese candle figures give information about the future.
Learning to read candlesticks and practicing is part of the foundation of a trader's education.
Building an investment process with Japanese Candlesticks
Japanese candlesticks can be used mainly in two cases: to confirm a trend and to announce a reversal. What you need to know is that the use of Japanese candlesticks can be done alone, in which case we will talk about "candlestick pattern" or by combining several candlesticks and in this case we will talk about "candlestick configuration".
A gap is an empty space within a price chart between the two neighboring candlesticks. Gaps occur when the following candlestick opens at a distance from the previous candlestick's closing price. This may happen if the market's view of the price rapidly changes and there's a sudden influx of buy/sell orders.
A bullish engulfing pattern is a candlestick that closes higher than the previous day's opening after opening lower than the previous day's close. A bullish engulfing pattern may be contrasted with a bearish engulfing pattern.
A hammer is a price pattern in candlestick charting that occurs when an asset trades significantly lower than its opening, but rallies within the period to close near the opening price. This pattern forms a hammer-shaped candlestick, in which the lower shadow is at least twice the size of the real body. The body of the candlestick represents the difference between the open and closing prices, while the shadow shows the high and low prices for the period.
A shooting star is a bearish candlestick with a long upper shadow, little or no lower shadow, and a small real body near the low of the day. It appears after an uptrend. Said differently, a shooting star is a type of candlestick that forms when an asset opens, advances significantly, but then closes the day near the open again.
For a candlestick to be considered a shooting star, the formation must appear during a price advance. Also, the distance between the highest price of the day and the opening price must be more than twice as large as the shooting star's body. There should be little to no shadow below the real body.
Conclusion: Candlesticks charts go beyond the graphic configurations
Japanese candlesticks are also ways of interpreting investor behavior.
In the management of financial savings, there are basically 3 ways to approach the markets:
A fundamental approach is composed of macroeconomic and microeconomic factors.
A more quantitative approach, favored by statistics, depending on the configurations, it is possible to analyze correlations and probabilities of increases or decreases according to macro, micro or graphic data.
The graphic approach, the one we have in this series of “How to read candlestick charts” articles. Analysis based on a graphical configuration of price movements.
The price movement in the third approach is obtained only through the confrontation of traders who buy and others who sell. When they buy or sell, it is because they have an analysis of expectations and we know full well that depending on the market operator, expectations are not the same. So, this allows us to see the psychology and analyze the behavior of investors.
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Disclaimer: This article is for educational purposes only and is not intended as investment advice. The investment processes described in this article follow a simple construction, without optimization. The objective is to test statistics, technical indicators and graphic tools. As well as to present the main steps to follow in the construction of your investment process.
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